Jack Heidel's blog on fiscal responsibility

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Donald Trump assumes office with perhaps the lowest favorability ratings of any modern president. According to the New York Times,

Mr. Trump’s approval rating is only 40% among all adults and just 46% among likely voters.

But a recent CNN poll reports that 48% of adults think he’ll do a good job as president and 61% think he’ll bring back well-paying jobs to economically depressed areas.

Contrast this with Barack Obama’s latest poll ratings:

According to Gallup Mr. Obama leaves office with an approval rating of 57%.

But Rasmussenreports that only 35% of likely voters think the country is heading in the right direction (with 55% saying that we’re headed in the wrong direction).

I interpret this to mean that the country is largely turned off by Mr. Trump’s crude speech and sleazy behavior, while still liking his economic program. On the other hand, voters like Mr. Obama personally while disapproving of many of his policies and accomplishments.

All of this leaves Mr. Trump in an amazingly good political position:

With unemployment currently at a relatively low 4.7% and the economy fully recovered from the Great Recession, even modest reform in tax policy coupled with energy, healthcare and financial deregulation could provide a significant boost to long stalled economic growth.

He is criticized for having no clear cut political philosophy but this means he is free to do whatever makes good sense regardless of ideology. This will be a huge advantage in working with both parties to get things done.

He has nowhere to go but up in the polls. Such an increase in personal popularity will create the semblance of forward momentum.

My last post, “What Is Slowing Down the U.S. Economy,” reports on an interesting analysis by the Gallup economist, Jonathan Rothwell, making an excellent case that three of the biggest drags on the U.S. economy are the costs of:

Healthcare. By far the biggest drag, healthcare costs have increased from 9% of GDP in 1980 to 18% in 2015. Mr. Rothwell notes that the average U.S. physician spends $83,000 per year to process claims and interact with insurance companies compared to $22,000 in Canada which has a single payer system. The solution, in my opinion, is to change the tax treatment of employer provided health insurance (to cover catastrophic coverage only) in order to give individuals more “skin in the game.”

Education. Although education costs have risen only from 6% to 7% of GDP over the past 35 years, education overall is 8.9% more expensive in 2015 than in 1980 and higher education is 11.1 times more expensive. Considering the ever increasing need for highly trained workers in today’s high-tech and globally competitive economy, such rapidly increasing cost presents a huge impediment to progress. Foundational K-12 education is also failing to close the achievement gap between low-income minority students and middle-class students. Such disparity in educational outcomes bodes ill for future social harmony. Even overall cognitive performance in math and literacy is now declining (see chart). These are tough problems to solve.

Housing. Again, only a 1% increase (from 11% to 12%) in GDP from 1980 to 2015 but this translates into a rental cost increase of 19% of GDP in 1980 to 28% of GDP in 2015. Also mortgage payment costs increased from 12% of GDP in 1980 to 16% of GDP today. Mr. Rothwell attributes these increases to a tightening of local zoning restrictions. There does not appear to be any general policy solution to such a problem.

Conclusion. The costs of healthcare, education and housing are eating up greater and greater amounts of family income and therefore are retarding economic growth and social progress. What can be done about these problems? Stay tuned!

We will soon have a new President and, even though his election was somewhat of a fluke, he will obviously want to help the blue-collar workers who elected him. The best way to do this is to make the economy grow faster.
The Gallup economist, Jonathan Rothwell, has just issued an excellent analysis of some of the major reasons for our current slow economy, “No Recovery: an analysis of long-term U.S. productivity decline.”

Says Mr. Rothwell:

The problem is severe. U.S. GDP growth per capita has declined from 2.6% in 1966 to .5% today. Small differences expand into vast gaps in potential living standards. 1% growth for the next 35 years would expand household income from $56,000 in 2015 to $79,000 in 2050 (inflation adjusted), whereas 1.7% growth would raise household income to $101,000 in 2050.

Changes in living standards are fundamentally linked to changes of how the quantity of goods and services relate to their cost. Deterioration in the quality-to-cost ratio for healthcare, housing and education is dragging down economic growth. These three sectors alone have increased from 25% of GDP in 1980 to 36% of GDP in 2015.

The cost of healthcare is 4.8 times as high today as in 1980, the cost of education is 8.9 times as high today as in 1980 and the cost of housing is 3.5 times as high today as in 1980. These compare to an overall cost increase of all items of 2.5 times today compared to 1980.

These three sectors have all gotten more expensive (without getting more productive), thereby absorbing more of families’ incomes, making it harder to satisfy other wants.

Conclusion. We all want schools that work, adequate housing, and quality healthcare. The problem is how to achieve these ends in a much more affordable manner. Stay tuned!

The Affordable Care Act has improved access to healthcare by already enrolling over 7 million Americans who were previously uninsured. It is estimated that there will be a total of 20 million new enrollees by the end of this decade.But as the above chart from a recent Gallup survey indicates, the cost of healthcare is now a big barrier for an increasing number of people with health insurance.
The University of Chicago economist, Casey Mulligan, discusses the cost issue in a recent Wall Street Journal article “The Myth of ObamaCare’s Affordability” as well as in a new book. He makes the following points:

Although the ACA helps specific populations by giving them a bigger piece of the economic pie, the law diminishes the pie itself by reducing the amount that American’s work and making their work less productive.

35 million men and women currently work for employers who don’t offer health insurance. These tend to be small and midsize businesses with lower paid employees. The result of penalizing businesses for hiring and expanding will be less hiring and expanding.

The “29er” phenomenon is a good example of how the law harms productivity. If a business has 50 or more employees who work over 30 hours a week, it is required to offer health insurance. Many employers have thus adopted 29-hour work schedules which lessens overall productivity.

Mr. Mulligan estimates that the ACA’s long-term impact will include about 3% less weekly employment, 2% less GDP and 2% less labor income. He also claims that these effects will be visible and obvious in just a few years by 2017!

The ACA is thus weakening the economy. For the large number of people who continue to pay for their own healthcare, healthcare is now less affordable.

Conclusion: we need true healthcare reform which addresses cost as well as access and this can be achieved by fixing Obamacare. It is not necessary to repeal it. The Manhattan Institute’s Avik Roy has developed a plan to do this: ”Transcending Obamacare.” Mr. Roy’s Plan would keep the exchanges, end both the individual and employer mandates, and migrate both the Medicare and Medicaid programs onto the exchanges over time. These features will greatly reduce the cost of American healthcare. Check it out and see for yourself!

In my last post I endorsed raising Nebraska’s minimum wage from $7.25/hour to $9.00/hour because Nebraska’s unemployment rate is only 3.6% and so a minimum wage boost is unlikely to put very many people out of work. I also stated opposition to President Obama’s proposal for a raise in the national minimum wage to $10.10/hour because it would likely put at least 500,000 people out of work.A recent article in National Affairs by Charles Lane, “A Grand Bargain on the Minimum Wage,”suggests an approach to end a perennial controversy over how to set a minimum wage at the national level. It is based on the following observations:

Increasing the minimum wage has broad public support. A recent Gallop poll found that 76% of Americans support an increase to $9.00/hour.

However, just 4% of minimum-wage workers are single parents. Only 11.3% of workers who would benefit from an increase in the minimum wage come from poor households. The majority of minimum-wage workers do not live in poverty.

A more efficient, better targeted support program for the working poor is the Earned Income Tax Credit which provides a refundable tax credit as high as $6,143 for an adult worker with three children.

Since 1959 the average income for a full time worker earning the minimum wage has equaled two-thirds of the poverty line for a family of four. The current poverty line for such a family is $23,850. This equates to a minimum wage set at $8.00/hour.

Another option would be to set the minimum wage at 45% of today’s average private sector wage of $20/hour. This would make it $9.00/hour. The CBO has estimated that a $9.00/hour minimum wage would put “only” 100,000 people out of work.

Once a new minimum wage level is determined, it should be automatically adjusted for inflation using the Consumer Price Index.

The EITC is not cheap; it currently gives $63 billion in benefits to 27 million workers. However the EITC’s improper-payments rate regularly exceeds 20% per year.

An expansion of the EITC to single, childless workers could be paid for by tightening up EITC’s payment methods.

All of these considerations suggest a way forward to end a long-standing political controversy in a productive manner. The national minimum wage should be raised to somewhere between $8.00 and $9.00/hour and then indexed to the CPI. At the same time the EITC should be tightened up and expanded to single, childless adults. Such a program combines fairness with a strong work incentive and should have broad appeal.

In my previous post I laid out the view of the economist, Tyler Cowen, in his new book “Average is Over”, that the powerful trends of globalization, technology, and ever increasing machine intelligence (such as Google’s search engines), will lead to a super elite 10-15% of American’s who will have the ability and self-discipline to master tomorrow’s technology and profit from it. The average middle class worker will be increasingly replaced or downgraded by intelligent machines. Social and economic inequality will continue to grow and this new trend will be very hard to overcome. This is a bleak prospect for the future of America.What can be done to resist this trend and to try to turn it around? Jim Clifton, the CEO of the Gallup Organization, says in “The Coming Jobs War”, that “what everyone in the world wants is a good job” and he has many ideas about how to boost the economy in order to produce more good jobs. According to Mr. Clifton, there is no shortage in this country of creativity, new inventions and innovation. What is lacking are successful business models to commercialize the good ideas which are already out there and create customers for new products. We need entrepreneurship. “Entrepreneurship has a direct impact on supply and demand, but with a distinction. It doesn’t just provide supply, it builds demand.”Next question: how do we boost entrepreneurship? We get government out of the way as much as possible. This means the lowest possible tax rates (offset by eliminating tax loopholes for the wealthy) and fewer burdensome regulations (such as the employer mandate for health insurance). As a society we have to decide which is more important: creating more and better jobs by growing the economy faster or making everyone more equal with higher taxes and more income redistribution. We can’t have it both ways. To reverse or at least slow down the trends which are now shrinking the middle class, the best policy is to go all out for entrepreneurship and investment!